Richard Asquith 23 Jan 2017 04:03pm

The top VAT changes predicted for 2017

Whilst 2016 tax news was all about direct tax global developments and reform, 2017 is set to be labelled as the year of burgeoning VAT fraud burdens

Caption: Will the EU break the VAT regime this year? Richard Asquith investigates.

The EU estimates that member states lose €50bn (£43bn) per year to VAT fraud, and member states are in revolt against the current regime. Splits have been emerging for years on new filings obligations, and these now threaten to turn to a schism later this year on the whole basis of the EU VAT regime and cross-border VAT payments of up to €600bn.

We will not see answers to the many questions regarding the future of VAT in the UK. Instead, EU elections and political posturing will probably mean no clarity on the UK’s position in the single market and subsequent VAT changes.

Elsewhere, expect a wobble from India on its goods and services tax launch, but full steam ahead in the Gulf States.

The VAT return is dead; long live transaction reporting?

The monthly and quarterly rush to check and file VAT returns across Europe is a seemingly indelible part of any finance department’s routine. But tax authorities across the world now think these do not help them adequately cope with massive VAT frauds. Instead, they need instant, electronic data on companies’ transactions that they can share internationally to detect and prosecute fast-moving criminal gangs.

In Europe, there are now 13 member states demanding full electronic lists of sales and purchase transactions – many countries have extended this into inventory movements and bank transactions. Whilst some of these requirements have been harmonised between states around the OECD’s Standard Audit File for Tax (SAF-T), most are on differing reporting formats and schemas.

The outcome of this drive means that tax authorities will soon know much more about companies’ businesses than the CFO. This will mean CFOs will be going into their next audit having to explain transactions and structures they possibly do not fully understand themselves.

Will the EU break the VAT regime this year?

Whilst live transactional reporting may be a big theme of 2017, it is a much more dramatic proposal from the European Commission (EC) at the end of December 2016 that could trigger a schism in the EU VAT system.

The EC initiative is to allow the use of the general reverse charge in any domestic B2B transaction above €10,000 if a member states wishes. The reverse charge would mean the VAT sales and matching purchases would both be reported by the purchaser, and there would be no need to make a cash payment of VAT. This eliminates the opportunity for fraud and theft. Many Central European countries, including the Czech Republic, are championing this measure.

Whilst such a change could kill off much of the VAT fraud, it would mean the end of one of the central pillars of the EU VAT regime: incremental payments of VAT along the supply chain. In effect, it would simplify the VAT to an elaborate sales tax system as used in the US.

The EU member states may yet fail to reach agreement on this, but the weight of VAT fraud is on its supporters’ side. Expect a decision by the end of spring.

An end to the 20 year-old ‘temporary’ VAT regime?

By the end of 2017 the EC has declared it wants to reach agreement on a "definitive VAT system" for the 28 member states. Currently, the country of taxation is the source country for goods, with the reverse charge simplification used on B2B transactions to avoid large volumes of cross-border cash payments. This system was introduced in 1993 with the launch of the single market.

The likely successor will be a full destination based regime. At first sight, this could mean, for example, a UK company having to pay German VAT to a German supplier. Across the EU, that could translate into over €600bn in new cash payments. It is unlikely that member states would accept this, or businesses would swallow such a treasury risk. It is therefore probable that some sort of accredited tax payer may be created to allow companies to avoid the payment.

Simplifying EU VAT for the digital economy

On a very positive note, the EC will be heavily engaged in simplifying VAT compliance details for thousands of businesses. This includes the potential extension of the e-services MOSS portal, which allow electronic services companies to file just one quarterly VAT return for all EU countries where they are selling.

The EC will also allow some more flexibility around setting reduced VAT rates – including reduced rates on e-books. But the member states blocked a UK push for complete freedom on rate setting.

The Brexit VAT questions fail to crystalise

Brexit is set to continue to dominate the headlines, but it is difficult to understand yet how this will affect VAT. This is because no negotiations have begun on UK’s position in the single market. However, more registrations and compliance loom for UK companies when the UK does leave – which will probably be 2020 or later.

India to miss another tax reform deadline in 2017?

India’s planned introduction of a Goods & Services Tax (GST) to replace its antiquated VAT system should still go ahead in 2017. But it is likely to miss the 1 April 2017 launch date, and be delayed until 1 September 2017.

Gulf states push on with 2018 VAT implementation

Despite the recent recovery in global oil prices, the six Gulf states will continue with their plans to implement VAT on 1 January 2018. This will soak up a lot of resources and VAT expertise from Europe and around the world. It is expected that 4,000 4,000 extra accountants and technology staff will be required, a major constituent of which will come from Europe with its deep VAT knowledge.

Richard Asquith, VP global indirect tax at Avalara